Proving Lost Profits


Abstract:
Establishing lost profits, particularly for new businesses that haven’t yet compiled any historical financial data, can be extremely challenging. In such cases, courts sometimes rely on data from comparable businesses. But as a recent New Jersey appellate court case illustrates, true comparability between the businesses is critical. A restaurateur who chose to testify on damages himself, drawing on his prior experience in the restaurant business, learned that his two businesses weren’t as comparable as he’d thought.


Proving Lost Profits
Comparable comparables are critical
Establishing lost profits, particularly for new businesses that haven’t yet compiled any historical financial data, can be extremely challenging. In such cases, courts sometimes rely on data from comparable businesses. But as a recent New Jersey appellate court case, Shalley v. Borough of Sea Bright, illustrates, true comparability between the businesses is critical.

Do-it-yourself damages testimony
Garret Shalley filed an application with his local zoning board for variances that would allow him to operate a restaurant in a part of a building that had previously housed a beauty salon. After the board denied the application, Shalley sought lost profits damages from the board, among others, alleging tortious interference with contract or prospective economic relations. To avoid the expense of hiring a damages expert, Shalley chose to testify on damages himself, drawing on his prior experience in the restaurant business.

The trial court granted the defendant’s summary judgment on all claims. On appeal, Shalley argued that he’d been wrongfully precluded from testifying on damages by the trial judge.

Looking at relevant lawThe court of appeals explained that lost profits are recoverable only if they’re capable of being established to a “reasonable degree of certainty.” A plaintiff can’t, therefore, recover anticipated profits that are too remote, uncertain or speculative. Lost profits need not be precisely fixed, but courts do require a “reasonably accurate and fair basis for the computation of alleged lost profits.”

The court also pointed out that New Jersey is among the minority of jurisdictions that apply the New Business Rule. Under the rule, prospective profits for a new business may be deemed too remote and speculative to satisfy the standard of reasonable certainty.

Profits not proven
Shalley based his testimony on lost profits on the profit margins he realized from operation of another restaurant he owned, which was located in another town. The trial judge declined to accept this information as a reasonably certain basis for the proposed eatery’s projected lost profits, noting several disparities between the two locations:

  • The proposed restaurant would have a different menu, supplier, name and financial scheme than the existing one,
  • The oceanside location of the proposed restaurant was “uniquely different” from the first’s urban location, and
  • The proposed restaurant was significantly smaller.

The trial judge also pointed out that Shalley didn’t know the population density of the surrounding areas for either restaurant, and provided no traffic or population density comparisons. Further, he failed to include salaries for himself and his mother in his projections or account for the necessary startup capital.

The court of appeals found that the evidence supported the trial judge’s conclusion that Shalley had failed to submit an adequate factual basis “from which a jury could, other than through pure speculation, opine as to what the revenues would have been” for the proposed restaurant. Because lost profits couldn’t be proven to a reasonable certainty, the appellate court also held that the question of the applicability of the New Business Rule was moot.

Lessons learned
By trying to save money on the front end, Shalley ultimately may have cost himself the case. The trial judge most likely wouldn’t have barred testimony from a qualified damages expert who based lost profits projections on more appropriate — or comparable — restaurants.